Back to Assignment Attempts:Do No Harme 19 Do No Harm: 19 5. Profitability ratio
ID: 2741299 • Letter: B
Question
Back to Assignment Attempts:Do No Harme 19 Do No Harm: 19 5. Profitability ratios Profitability ratios help in the analysis of the combined impact of liquidity ratios, asset management ratios, and debt management ratios on the operating performance of a firm. Your boss has asked you to calculate the profitability ratios of Sixty-Second Avenue Inc. and make comments on its second-year performance as compared to its first-year performance The following shows Sixty-Second Avenue Inc.'s income statement for the last two years. The company had assets of $5,875 million in the first year and $9,398 million in the second year. Common equity was (qual to $3,125 million in the first year, 100% of earnings were paid out as dividends in the first year, and the the second year. firm did not issue new stock in Sixty-Second Avenue Inc. For the Year Ending on December 31 (Millions of dollars) Year 2 Year 1 3,175 2,500 1,610 1,495 100 Net Sales Operating costs except depreciation and amortization Depreclation and amortization 159 Search the web and WindowsExplanation / Answer
Use the following formulas:
Operating Margin = Operating Income/Net Sales, Profit Margin = Net Income / Net Sales , Return on Total Assets = Net Income/ Avg Total Assets or Beginning of year Assets, Return on Equity = Net Income/Beginning of Year Equity; Basic Earning Power = Operating Income or EBIT/ Total Asset
Common Equity will be same for both years i.e. $3125 million as the company paid all the earnings in dividend and did not issue any common shares.
So the values of all your ratios including ROE (return on equity) are correct.
Also, amongst the four options 1 and 3 are correct.
Year 2 1 Operating Margin 44.28% 36.20% Profit Margin 23.91% 18.88% ROA 8.08% 8.03% ROE 24.29% 15.10% Basic Earning Power 14.96% 15.40%Related Questions
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